Over-the-counter (OTC) financial products include financial instruments and investment vehicles that are bought, sold, traded, exchanged, and/or swapped between counterparties. After an exchange of an OTC financial product, the parties may expend resources managing the product for the duration of its life. Management may be complicated based on the number of exchanges and/or the specific terms of the contract.
Interest rate swaps (IRS) are examples of financial products that are traditionally exchanged, traded or otherwise bought and sold in an OTC market. The IRS is a financial product or investment vehicle where the parties agree to exchange streams of future interest payments based on a specified principal or notional amount. Each stream is typically referred to as a leg.
An example of an IRS is a plain fixed-to-floating, or “vanilla,” interest rate swap. The vanilla swap includes an exchange of two streams of payments, where one stream is based on a floating or variable interest rate and the other is based on a fixed interest rate. The variable interest rate may be linked to a periodically known or agreed upon rate for the term of the swap, such as the London Interbank Offered Rate (LIBOR). The variable rate may be based on other agreed upon factors such as a reference rate, the total return of a swap, an economic statistic, etc. Other examples of swaps include total return swaps, and Equity Swaps.
The expiration or maturity of the streams of payments may occur well into the future. A book of existing and new IRS may include multiple IRS having a variety of maturity dates. In the OTC market, the parties to an IRS, such as banks and intermediaries, each bear the risk and expense of carrying the IRS over the lifetime of the swap. Typically, a party may reverse the IRS only by renegotiating the IRS with the counterparty. Older IRS's that may be on the books may be obsolete and add “noise” to a party's balance sheet.
It would be desirable to provide processes and methods for converting or netting outdated swaps.